State tightens rules on Enterprise Zones

Businesses in San Diego County’s Enterprise Zones -- which include a huge swath of territory from the Mexican border to downtown La Mesa -- may soon find it more difficult to get tax credits for having “economically disadvantaged” workers on their payrolls.

New regulations being drafted in Sacramento -- aimed at all 40 Enterprise Zones statewide -- require businesses to submit more proof that their workers qualify for the credit and block them from retroactively claiming tax credits for existing workers.

Nearly 450 businesses in San Diego now have tax-credit vouchers from the program, covering around 8,000 workers and cutting the business' total tax bill by around $30 million, based on data from the State Franchise Tax Board and the California Enterprise Zone Association.

Those vouchers can be lucrative, helping the businesses cut their taxes by as much as $37,400 per covered employee during the first five years of employment.

But Gov. Jerry Brown's administration questions whether such incentives are actually boosting job creation. By tightening the rules on the program, it argues, the state could gain an estimated $310 million in taxes over the next five years, including $10 million this year and $50 million next year.

“Some of our [practices] currently don’t make sense,” Colin Parent, director of external affairs at the California Department of Housing and Community Development, told San Diego civic and business leaders in a webcast this week. “We want to make sure that the program has a degree of public accountability so that the public is confident that the program is achieving the goals that are intended.”

On the other hand, the zones’ advocates say the vouchers are an important tool for keeping or attracting businesses and too much regulation could blunt their effectiveness.

“Gov. Brown sees this as a cost, but it’s really an investment -- a job creation and retention tool that provides jobs for veterans and helps pull people off the unemployment lines,” said Brendan Foote, senior vice president for tax credit services at Hughes Marino Inc. in San Diego.

On Wednesday, both Foote and Parent are scheduled to appear at a public forum on the proposed restrictions on the zones at Liberty Forum at 1 p.m. The forum is one of a series being held throughout the state to allow for input before the regulations are finalized.

California launched the Enterprise Zone program in 1986 to promote economic development in low-income areas.

The zones provide tax breaks on manufacturing and business equipment, as well as tax credit vouchers for businesses that hire veterans, welfare recipients, ex-convicts, Native Americans, the disabled, the long-term unemployed and the “economically disadvantaged,” as well as residents of low-income, high-unemployment neighborhoods, referred to as “targeted employment areas.”

Since San Diego County got its first Enterprise Zone in San Ysidro and Otay Mesa in 1992, the program has expanded to cover much of the western section of the county below Interstate 8, as well as parts of Rancho Bernardo, Kearny Mesa, Mira Mesa, Mission Bay, Grantville and Liberty Station.

The program has been drawing fire since 2009, when a report by the Public Policy Institute in San Francisco said it had no effect on job growth, with little difference in employment growth between the zones and other neighborhoods.

“Our findings cast a skeptical eye on [the zones],” said Jed Kolko, who coauthored the report. “For a cash-strapped state, it is too costly a program to simply continue with 'business as usual' without clearer evidence of its benefits.”

But a study the same year by the University of Southern California argued the opposite, suggesting that the zones boosted employment by 2.2 percent and wages by 2.1 percent.

In a time of economic downturn, the last thing you’d want to do is cut a program that increases jobs and decreases poverty,” said USC tax specialist Charles Swenson.

As the debate raged, the program continued to expand. Over the past five years, the number of Enterprise Zone vouchers statewide has doubled, jumping from 69,236 in 2008 to 140,833 in 2012. The total tax effect of the program has risen from $410 million in tax cuts in 2006 to $732 million in 2010.

When Gov. Brown took office in 2011, he lobbied the legislature to end the program as a way of creating more tax revenues. After those efforts failed, he shifted toward drafting new regulations for the program instead.

One of the major targets is the retroactive nature of the hiring vouchers, which allows businesses to apply for the credit up to four years after a worker has been hired.

“There’s a whole industry of tax consultants who find companies in the Enterprise Zone and search for workers who qualify for vouchers, sometimes years after they’ve been hired,” Parent said. “That can bring a windfall for the company and the tax consultants claim a percentage of it.”

The new law aims to end that by requiring businesses to apply for a voucher within the worker’s first year on the job. But Foote says that would be too restrictive and argues that the application deadline should be extended at least to 18 months.

The law also requires proof that employers claiming credit for hiring workers from “targeted employment areas” must show proof that they live there before qualifying for the voucher. And it would require proof that “economically disadvantaged” workers are poor enough to qualify.

“Currently, employers just fill out a form that states the previous income of the employees,” Parent said. “That’s not a good way for local governments to verify the economic status of the employees. We need third-party verification.”

But Foote says the requirement could be too burdensome on smaller businesses.